Ever wonder what a stockbroker actually does during the day? Well, brokers are agents who take and fill your orders to buy and sell stocks and other securities. They charge commissions for these services, and in some cases, they also offer you advice and make recommendations. (Practices may vary widely depending on whether the brokerage is full-service or discount.)
A former broker revealed to us how he was trained and under what conditions brokers often work. Take a gander at these eye-opening snippets:
He explained that it was hard to land the job of broker, since his educational background (a BS in business and an MBA) and training counted far less than his lack of prior sales experience. His on-the-job training actually included a course called "Guerrilla Cold Calling," covering how to call and sell to as many prospects as possible. Prospects were found by looking in the Yellow Pages for doctors, lawyers, and the like.
Every morning there was a "Squawk Box" call from the home office on Wall Street, listing stocks upgraded or downgraded by analysts that day. These represented reasons to call clients and urge them to buy or sell (generating all-important commissions). The brokers were updated weekly on new investments to push, such as complicated options strategies or limited partnerships that could be pitched as tax shelters. They were also given lists of stocks that the firm held in inventory and needed to get rid of. These were to be aggressively sold to clients, "commission-free." Calls were often made during dinner hours, and clients were urged to decide immediately. ("Commission-free if you buy tonight!") Contests were even held, with prizes awarded to those who generated the most sales.
This is just one broker's experience, but from what we've heard, it's not an uncommon one. While it's true that many brokers are good people who do well by their clients, sadly, others are simply salespeople ringing up commissions to get ahead. We think this represents an unacceptable conflict of interest. Financial professionals should be compensated on how well they manage your money, not how often they churn it. Try asking your broker these questions, to gauge whether he or she has your best interests at heart.
To learn more about investing Foolishly and how the business world works, visit our Fool's School and our Investing Basics area. Or check out some of our inexpensive and well-regarded online how-to guides (which feature money-back guarantees).
You can also learn all about brokerages and find one that's right for you in our Broker Center. Did you know that some well-regarded brokerages are offering commissions as low as $5?
This article has been updated by Foolish research associate Katrina Chan and was originally published on March 22, 2006.